Supply and Demand are not equal and opposite twins. They are complimentary like horse and carriage and they work if arranged in the proper order. Don't put the carriage before the horse or Demand before Supply. I think I summed it up quite well when I said that "Demand creates queues. Supply gets rid of them." This is my version of Say's Law which says that supply creates its own demand.

There is the impression that tax cuts stimulate the economy. That is not correct, taxes hamper the economy and removing taxes just removes a negative, it does not add a positive. Let's look at this in terms of Say's Law. According to Say's Law when you set up production you have to pay for machinery, materials and labor and these expenditures are the source of the funds that fuel the demand of the things being produced. When the government introduces a tax, the same amount of expenditures by the producer creates less demand because part of the funds are diverted to government and is not available to consumers. You might says that the government will spend this money and it flows right back into the economy as demand. Governments have different spending habits than individuals. Individuals tend to spend on immediate needs like food, shelter, and recreation while governments spend on moon landings and foreign wars. Spending money at Mac Donald's circulates the money back into the economy faster than paying Lockheed to pay Raytheon to pay a university to do research on a fuel valve for the space shuttle. Capital goods like roads and dams circulate money a lot slower than eating a Big Mac does. It is not just the amount of money, it is also how fast it circulates.

The problem with government is that it is totally incapable of creating supply, that is the job of free enterprise. All government can do is to line up on the demand side and increase the size of the queues. Cutting taxes reduces the government queue and increases the private queue but it does not increase production.

Cutting taxes is like pushing on a wet noodle.

Many billions of dollars have already been given to the banks and they disappeared into a black hole. Why should new dollars have a different fate? What in this new administration has stiffened the wet noodle enough to make it into an effective prod?

Mind you, I'm all in favor of cutting taxes. It's just that the expected results are not likely to materialize. The reason is that taxes cut themselves in a poor economy: if you are not taking home pay and not spending, you are not generating income or sales taxes. This thought was brought home to me by John Mauldin's latest Out of the Box newsletter

One of the best gauges of an economy is tax collections. No one pays taxes unless they have to, so collections are a real-world, real-time analysis of the US economy. And the best source I know of for tracking taxes is The Liscio Report, by Philippa Dunne & Doug Henwood.

Supply and Demand are not equal and opposite twins. They are complimentary like horse and carriage and they work if arranged in the proper order. Don't put the carriage before the horse or Demand before Supply. I think I summed it up quite well when I said that "Demand creates queues. Supply gets rid of them." This is my version of Say's Law which says that supply creates its own demand.

The problem with government is that it is totally incapable of creating supply, that is the job of free enterprise. All government can do is to line up on the demand side and increase the size of the queues.

"A Field of Dreams:" A movie where the protagonist (Kevin Costner) builds a baseball field in the middle of nowhere; an Idaho cornfield, and miraculously crowds of people show up to watch the game. The film was a whimsical fantasy. The reality now is there is an over supply of baseball games in cornfields and no interest in baseball.

The problem at the moment is massive over supply and very limited demand. If demand is the carriage, and supply the horse; as you suggest, then the carriage has a wheel off at the moment, perhaps,two. General Motors is on the verge of bankruptcy because very few customers are driving a new car off the dealer's lot. Retailers are having 50% off sales because of bloated inventories that the consumer doesn't have enough disposable income and the inclination to buy.

It seems to me that you've made the case for the stimulus package. The private sector, as you rightly say provides most of the supply (baseball fields in corn fields). The private sector is on it's knees because of the steep fall off in demand. The horse has been uncoupled from the carriage. It's not supply we need, it's demand (big time) as you say: "All government can do is to line up on the demand side and increase the size of the queues."

It's a tough job to stimulate demand, but that's exactly what has to happen to turn things around.

"A Field of Dreams:" A movie where the protagonist (Kevin Costner) builds a baseball field in the middle of nowhere; an Idaho cornfield, and miraculously crowds of people show up to watch the game. The film was a whimsical fantasy. The reality now is there is an over supply of baseball games in cornfields and no interest in baseball.

Is Kevin Costner your favorite economist? Any resemblance between reality and his films is involuntary, probably an error during editing. The name of the film is a giveaway "A Field of Dreams," not a field of object reality. :)

The problem at the moment is massive over supply and very limited demand.

Simply not true. GM lemons sitting on dealer's lots are not supply but scarp. Overpriced homes are not supply. Supply is that which people are willing to buy. Propping up home prices and GM are among the biggest mistakes this and the past administration have made.

One of the jobs of markets is to weed out undesirable, uneconomic players. That is what GM and Chrysler have become and it is time to put them out to pasture. It's really too bad that Chrysler was rescued in the days of Lee Iacocca, that was a perfect time to dispose of that company. It would have made Ford and GM stronger. But no, jobs had to be saved in one company so they could be lost elsewhere.

Every home whose price is propped up means one less home a less wealthy person can buy. It's not a question of supply and demand but one of price distortion. The proper end of bubbles is for strong hands to take over from weak hands but this will only happen if prices drop. This is basic BMW Method, you buy when prices are low, not when they are high. Supply means affordable homes not homes whose prices are propped up artificially with mortgage rescue plans. Why it is better for Peter to own the home instead of Paul was never explained by the rescuers. They are rescuing people whose folly led them to overpay.

Retailers are having 50% off sales because of bloated inventories that the consumer doesn't have enough disposable income and the inclination to buy.

Wal Mart, Family Dollar, Buffalo Wild Winds, True Religion, and Urban Outfitters are all doing very well while Neiman Marcus is not. Maybe there is something wrong with Neiman Marcus in this environment? Should Obama rescue Neiman Marcus customers who no longer can afford to buy there? After all, all those sales people are likely to lose their jobs and that would be a disaster for America. Unfortunately the loud minority gets rescued, the silent majority is mostly ignored. Maybe Neiman Marcus shoppers should get organized, open a chapter in the AFL-CIO and lobby Washington for a rescue package. It might work. The slogan might be: "Rescue NM Sales Clerks."

The private sector, as you rightly say provides most of the supply (baseball fields in corn fields).

Did Kevin Costner get an Oscar in economics? hahaha

Baseball fields in corn fields is not supply, its a plot for a movie for an actor who is totally disconnected from reality. The movie itself was supply and well received.

Why it is better for Peter to own the home instead of Paul was never explained by the rescuers. They are rescuing people whose folly led them to overpay.

Perhaps it is because Pam, who holds the mortgage, might actually lose less by keeping Peter in the home as opposed to the cost of foreclosing and selling it to Paul. This lessening of Pam's actual losses may in turn reduce the likelihood that the "rescuers" would need to continue to rescue Pam. Heck it might even keep them from raising taxes as much on Peter, Paul and Pam in the future to pay for it all.

GM lemons sitting on dealer's lots are not supply but scarp. Overpriced homes are not supply. Supply is that which people are willing to buy.

It's an absurd argument that unsold inventory is scrap — that if people don't have inclination, or money, to buy something, the best thing for that 'something,' and its manufacturer, is the garbage heap; that it has no worth. Over supply is what happens when it's out of sync with demand — period. Supply isn't just what people are prepared to buy at the moment.

From your original post: Cutting taxes reduces the government queue and increases the private queue but it does not increase production.

Yes it can, yes it does. Cutting taxes, puts more money in people's pockets; or more accurately takes less money out. This leaves them more money to spend, more spending leads to increased production — and we're off to the races.

Perhaps all that talk of horses and carriages got me thinking of Kevin Costner?

Is Kevin Costner your favorite economist? Any resemblance between reality and his films is involuntary, probably an error during editing. The name of the film is a giveaway "A Field of Dreams," not a field of object reality. :)

That was my point! Supply isn't necessarily the horse that pulls the carriage of demand, often times there's a supply but there's diminished demand for the moment. That's where we are. The issue is stimulating demand, which you think the government can do :) If now your definition of supply is only the bare necessities people are buying at the moment, and to hell with everything else, we as a society; and a country, will become impoverished in more ways than one. A bleak wasteland dotted with only Wal Mart, Wild Buffalo Wings and Dollar General — and this is a good idea!

In it's most basic terms, a recession is the dislocation which occurs when the mix of goods and services which an economy produces does not match the mix of goods and services demanded by that economy. The recession ends when the output adjusts to fulfill the demand. We have a recession now and lots of folks would like to see it end.

Free marketeers believe that the most effective tool for adjusting an economy's supply to match its demand is capitalism.

Socialists think that it's not the free market that is the best choice for this role, but rather government.

Somewhere in between lies America (and much of the world).

So there's going to be some government participation (G) with the stated goal of ending the recession and resuming non-inflationary growth and full employment. What can G attempt?

• Create new supply to satisfy what's being demanded but not provided. Issue some Treasury obligations. Increase government and university lab spending, research tax credits and such.

• Create new demand. Buy more of what the economy is already producing in quantities that exceed that which is demanded. Build some schools and bridges. Subsidize house prices. Bail out some automakers.

Denny, you beat me to the punch. I was going to post the following article because it explains the situation perfectly.

If anyone needs a visual representation of the stimulus package, here is the key quote:

"Imagine you see a person at work taking buckets of water from the deep end of a swimming pool and dumping them into the shallow end in an attempt to make it deeper. You would deem him stupid. That scenario is equivalent to what Congress and the new president proposes for the economy."

Perhaps it is because Pam, who holds the mortgage, might actually lose less by keeping Peter in the home as opposed to the cost of foreclosing and selling it to Paul.

B

Bob, I've been thinking about this suggestion but it does not ring a bell. If it were true that not foreclosing is better than foreclosing then there would be no foreclosures, would there? Why would a mortgage holder prefer to lose more than to lose less? If not foreclosing were the better deal then we would not need government help to make it happen.

Economic logic would dictate that not foreclosing is a good idea when someone else pays the loss, for example the taxpayer.

"Imagine you see a person at work taking buckets of water from the deep end of a swimming pool and dumping them into the shallow end in an attempt to make it deeper. You would deem him stupid. That scenario is equivalent to what Congress and the new president proposes for the economy.

It all depends on the size and nature of the pool. Nature takes buckets of water out of the oceans and dumps them on mountain tops only to see the water flow right back to the oceans but some good things happen in this cycle, like farming and trout fishing. And some bad thing happen too like flooding, mud slides, icy road and avalanches. Should we stop the rain because it does all this harm or encourage it because it does all this good or maybe just stand aside and let nature do its thing?

I'm for the third choice not because the first two are necessarily bad but because we don't have the ability to create the desired outcomes without also creating some rather negative ones. We do not know how to stop the Law of Unintended Consequences from doing its thing. Transfer payments are mostly*** about playing favorites. Is that a valid use of government power or is it an abuse of power?

Denny Schlesinger

*** Please note the word "mostly." There are some cases where collective action is a valid undertaking.

Have you even owned a business that carries inventory? If so, you would know that unsold, unwanted inventory gets marked down again and again until it sells and whatever is not sold is given to charity or sold for scarp.

Also, as an investment analyst, you would check inventory and accounts receivable levels at retail outfits. If either or both outpace revenues, you are in trouble.

If now your definition of supply is only the bare necessities people are buying at the moment, and to hell with everything else, we as a society; and a country, will become impoverished in more ways than one. A bleak wasteland dotted with only Wal Mart, Wild Buffalo Wings and Dollar General — and this is a good idea!

You are rather selective in your reading of my posts. You ignored True Religion which sells $300 jeans, not precisely a necessity of life. :)

Perhaps it is because Pam, who holds the mortgage, might actually lose less by keeping Peter in the home as opposed to the cost of foreclosing and selling it to Paul.

B

Bob, I've been thinking about this suggestion but it does not ring a bell. If it were true that not foreclosing is better than foreclosing then there would be no foreclosures, would there? Why would a mortgage holder prefer to lose more than to lose less? If not foreclosing were the better deal then we would not need government help to make it happen.

Economic logic would dictate that not foreclosing is a good idea when someone else pays the loss, for example the taxpayer.

Denny Schlesinger

Denny, you are looking at only 2 data points. How much does the bank (Pam) lose in a foreclosure vs. the combined loss of the bank & government assistance?

It’s a very complex issue to be sure, but I can think of several points off the top of my head that you aren’t considering.

1. By foreclosing you introduce a lot of additional costs to the equation that will increase the losses to the bank. Although I don’t know what the precise figures are and I’m sure they vary a lot from property to property they are substantial none the less.

2. If a house is foreclosed on, in addition to the extra frictional costs to the bankers, the house at best will be sold at current market prices and may be sold at an even lower distressed price. These houses being dumped on the market will further serve to weaken the market which will contribute to increase losses on future foreclosures that the bankers are forced to make.

3. By the government stepping in and insuring that the help is directed in a way that it is tied directly to ability to pay the mortgage they will prevent a subset of owners from defaulting strictly because of their inability to pay, as opposed to people who are prepared to walk away because they are losing money and fear losing more. I have no doubt with the help of this program, there are many people that will muddle through their current problems, despite the fact the economics for them might make it better for them to just walk away. There really are people in this country that believe in doing their best in honoring their obligations.

4. When looking at the cost to the government (or tax payers) you have to consider the cost of doing nothing. Foreclosures lead to falling home prices which lead to more foreclosures. Falling home prices cause current homeowners to cut back on spending creating further economic disruption which in turn leads to equity declines making everyone feeling poorer. Lower tax collections, rising government expenditures to fund our safety net.

I think it looks like a pretty decent program as government programs go. Will it “solve” the problem? Not likely, but it should help.

Have you even owned a business that carries inventory? If so, you would know that unsold, unwanted inventory gets marked down again and again until it sells and whatever is not sold is given to charity or sold for scarp.

When I wrote about unsold inventory you chose to ignore my qualifier "at the moment" in italics, no less, for emphasis :)

It's not a realistic expectation that Bentleys sitting in showrooms are going to be given to charity, or sold for scrap. You're seeing things very much in black and white.

Also, as an investment analyst, you would check inventory and accounts receivable levels at retail outfits. If either or both outpace revenues, you are in trouble.

I don't think anyone's arguing, least of all me, that a build up in unsold inventory is a good thing; it isn't.

That's not what I said. In some ways I'm a fan of Wal Mart.What I said was: (and you quote it back, but clearly didn't understand it if you think that I consider Wal Mart a bleak wasteland)"…A bleak wasteland dotted with only Wal Mart, Wild Buffalo Wings, and Dollar General — and this is a good idea!"

The sense of the words can be gleaned from the order they are in :)

While we're at it, this is just plain silly:If it were true that not foreclosing is better than foreclosing then there would be no foreclosures, would there?

If it were true that not having a car accident is better than having one, then there would be no car accidents. would there?Before you protest, a foreclosure is akin to a car accident; it's a financial accident — you didn't see what was coming round the next bend.

I think you are twisting yourself up in knots trying to justify a deep seated ideology and political point of view (in my opinion) — that government is bad; government is cynical; anything government attempts to do is wrong-headed and doomed to failure. Your arguments to support this are to say the least; flawed, and in this area you have no objectivity, and are getting a little hot under the collar. Just my opinion :) Nothing personal.

Perhaps it is because Pam, who holds the mortgage, might actually lose less by keeping Peter in the home as opposed to the cost of foreclosing and selling it to Paul.

B

Bob, I've been thinking about this suggestion but it does not ring a bell. If it were true that not foreclosing is better than foreclosing then there would be no foreclosures, would there? Why would a mortgage holder prefer to lose more than to lose less? If not foreclosing were the better deal then we would not need government help to make it happen.

One reason that a mortgage might be foreclosed when readjustment makes more sense is this: there is no Pam.

The mortgage was put in a bundle with 9,999 other mortgages and the bundle was split into 1000 CMOs who have 1000 owners. 300 of those owners are actually themselves bundles of 1000 CMOs and these bundles were split into 500 CDOs which have 500 owners. So there are nearly 151,000 people who own a piece of Peter's mortgage through the CDOs CMOs.

And NOBODY has authority to speak for those 151,000 people at a readjustment negotiation.

Well, it might not be 151,000. Often the entity that creates the CMOs keeps the lowest-rated tranche. Which means that under the standard contract, if they adjust the contract they take 100% of the loss. If that wipes out their stake in the mortgage, they have no incentive to renegotiate - even if they have the authority.

I think you are making things overly complicated as a way to back your contention that banks are worse off by foreclosing than by not. Let's simplify instead.

Let's take the case of no government intervention. Neither of us is a mortgage banker so we don't know the details of the costs involved. If I were a mortgage banker I would try to establish the benefit of foreclosure vs. not foreclosing including all the knowable inputs. I would then foreclose when the benefits outweigh the negatives. I think you can grant this logic to be sound. If this logic is sound and banks are foreclosing them the benefits of foreclosing outweigh the negatives (provided bankers are economically rational hahaha). There is another kind of foreclosure, the owner/debtor walking away. Here the bank is not in control so I cannot argue one way or the other for the bank directly, but if it a win for the owner/debtor then it is probably a loss for the bank although not necessarily.

In other words, if foreclosure were not the best alternative for a bank, there would be no foreclosures but there are foreclosures so the alternatives must be worse.

While we're at it, this is just plain silly:If it were true that not foreclosing is better than foreclosing then there would be no foreclosures, would there?

If it were true that not having a car accident is better than having one, then there would be no car accidents. would there?

Before you protest, a foreclosure is akin to a car accident; it's a financial accident — you didn't see what was coming round the next bend.

kelbon

No, a foreclosure is not a financial accident. The financial accident is the non-payment. Once you have had your car accident you decide if you send the remains to the wrecker or to the body shop.

Wrecker = foreclosureBody shop = a deal with the owner/debtor

If a foreclosure were the equivalent of a car accident, you would have to call your attorney to start proceeding that lead to the car accident. :))

Talking about twisting into knots... hahaha

Since you didn't answer my question about being a business owner dealing with inventories, let me give you an example from the real world. I used to be an Apple dealer in Caracas and I got my Apples from the local distributor. I sold 25% of all Apple /// sold in Venezuela. When the Mac came out and the Apple /// was discontinued, I sold all my inventory, including spare parts and components at a large discount. One day visiting the Apple distributor I noticed that he had several of them in the warehouse. I asked a staff member about it. His reply: "Peter is not willing to sell them under his cost." I suppose he would still have them had he not closed down the business. At that point in time, Apple ///s had become scrap with some salvage value.

Unsold cars on dealers' lots, when there are no buyers for them, have some salvage value, but certainly not their original book value. I use the word scarp for emphasis but I suppose that is too literal for you.

I can give you another example. When I closed down my California business I published an ad selling the furniture in my town house. Some sold and some was given to a charity and I took what salvage money I could get for it. Scrap!

Your arguments to support this are to say the least; flawed, and in this area you have no objectivity, and are getting a little hot under the collar. Just my opinion :) Nothing personal.

Well, it might not be 151,000. Often the entity that creates the CMOs keeps the lowest-rated tranche. Which means that under the standard contract, if they adjust the contract they take 100% of the loss. If that wipes out their stake in the mortgage, they have no incentive to renegotiate - even if they have the authority.

warrl

Interesting point!

Some time ago I read about owners of the toxic waste trying to foreclose and not being able to do so because the title to the mortgage had not been properly passed from the originator to the toxic waste makers. A judge would not let them evict the owner.

In any case, I think the Trust or SIV that manages the toxic waste would be the entity that collects and forecloses if it cannot, not the actual owners of the ranches. The Trust or SIV would act as their representative and not the bank that originated the deal (although the SIV is controlled by the originator).

One reason that a mortgage might be foreclosed when readjustment makes more sense is this: there is no Pam.

The mortgage was put in a bundle with 9,999 other mortgages and the bundle was split into 1000 CMOs who have 1000 owners. 300 of those owners are actually themselves bundles of 1000 CMOs and these bundles were split into 500 CDOs which have 500 owners. So there are nearly 151,000 people who own a piece of Peter's mortgage through the CDOs CMOs.

And NOBODY has authority to speak for those 151,000 people at a readjustment negotiation.

Well, it might not be 151,000. Often the entity that creates the CMOs keeps the lowest-rated tranche. Which means that under the standard contract, if they adjust the contract they take 100% of the loss. If that wipes out their stake in the mortgage, they have no incentive to renegotiate - even if they have the authority.

Ah, but there's always a Pam. Every MBS I've seen, which admittedly omits the vast majority of them, does not not allow the servicer to foreclose on a pooled loan unless it's clearly demonstrated that it's cheaper than not foreclosing. Fannie and Freddie have similar rules in their master trust agreements and servicing guidelines.

The dynamic here is between the different motivations of the servicer and the noteholder.

The servicer wants to foreclose ASAP because they bear all the costs of a delinquent loan. They have to forward the P&I to the pool even though they didn't get a payment from the borrower. They have to pay the costs for collection attempts and foreclosure proceedings. They may have to make property tax payments or repairs to keep the home saleable. Now they do recover all valid expenses when the loan pays off (foreclosure is a payoff), but they've had to lay out that money for quite a while and they don't love that.

The noteholder knows that a foreclosure is going to involve a loss of capital. The top tier may not be too concerned but there's always someone who knows that he's about to lose some money. Even if you're only drawing down an overcollateralization you've given up security and maybe triggered an acceleration of the higher tier(s) - an ugly event for those at the bottom of the capital ladder. The point is that someone's ox is being gored and they care deeply. If the mortgage has a guarantor then they bear this loss and make the noteholder whole. They've become Pam. They'd rather see the servicer take some more time to attempt a foreclosure intervention. In fact, they don't lose money until foreclosure. They get P&I up till then.

Fannie has recently reached out to servicers in attempt to promote workouts.

"Imagine you see a person at work taking buckets of water from the deep end of a swimming pool and dumping them into the shallow end in an attempt to make it deeper. You would deem him stupid. That scenario is equivalent to what Congress and the new president proposes for the economy."

Of course, the reality of the situation is completely different. To help fill up the swimming pool we're actually borrowing buckets of water; not taking water from one end of the pool to the other. We're promising to give back that water we're borrowing a bucket at a time, with an extra bucket thrown in for good measure. We'll probably be borrowing more buckets of water in the future to help keep our pool filled, so as one bucket is handed back, we receive another one, and so it goes…

The original argument could make sense, if for instance, you came from Mars, and didn't understand that the pool isn't a self sustaining entity but instead is connected, to and from, a myriad of other pools, great and small.

No, a foreclosure is not a financial accident. The financial accident is the non-payment. Once you have had your car accident you decide if you send the remains to the wrecker or to the body shop.

Wrecker = foreclosureBody shop = a deal with the owner/debtor

OK, as you wish, I'll restate it, as the specifics of car accidents seem to be what interests you. "Before you protest, a foreclosure is akin to a car accident, in which your car is totaled; it's a financial accident — you didn't see what was coming round the next bend.

Better?

No, I've never owned a business with inventory.Businesses without inventory can be much more cost effective.That's not facetious, selling a service; Moody's, if you like.

No. Foreclosure is what happens after the accident, it's how you clean up the accident. The accident happens first. In the car case, it's calling the wrecker, 911, police, your insurance company and all the other details that have to be attended to to clean up the accident.

Businesses without inventory can be much more cost effective.That's not facetious, selling a service; Moody's, if you like.

I agree with you, so why are they trying to save GM that does not provide a service but a product? Hmmm...

Did I say knotted; surely not.

Short term memory failure?

I think you are twisting yourself up in knots trying to justify a deep seated ideology and political point of view (in my opinion)

I think you are making things overly complicated as a way to back your contention that banks are worse off by foreclosing than by not. Let's simplify instead……

…..In other words, if foreclosure were not the best alternative for a bank, there would be no foreclosures but there are foreclosures so the alternatives must be worse.

Denny well you certainly managed to simplify, you went from using two data points down to one. I agree that if you only approach it from the view of the banker it is easy to determine what is best for the banks.

Where we apparently disagree is that a combination of the banks, homeowners, and government, when considering all of the implications, can make things better for everyone through sensible cooperation. No winners anywhere to be found just a crack at making things better IMO.

Am I supposed to be impressed that a mob of guys, fed a loaded question, who spend their lives in a feeding frenzy trying to squeeze the last penny out of a trade might agree with his view. Many of these guys would knock down their Grandmother if she got in the way of their pursuit of that last penny.

They are pretty much just a junior wanabees of the people who caused the mess we are in to begin with.

The problem with government is that it is totally incapable of creating supply, that is the job of free enterprise.

This, of course, is completely wrong. The Erie Canal was created by government. Oh, private enterprise tried, and failed, a half dozen times. When government got behind it, it opened up a new transport system which brought midwestern flour to New York, and New Yorkers to new lands in Ohio. The price of bread dropped by 90% as transport became so gigantically efficient.

Along the way it produced thousands of jobs for people digging the big ditch, and then monitoring the barge traffic, running the locks, collecting the tolls, and so on. That was a stimulus package for the 18th century which paid dividends for the entire economy for a century afterwards.

Anybody want to argue that we are better off with a Panama Canal than without it? Want to guess whether it was private enterprise or government which managed to make it happen?

Hoover Dam, anyone? The Grand Coolee? The TVA? That one is of particular interest because it pitted private enterprise against a government bureaucracy. Prior to the TVA, 30% of the people living in that area contracted malaria. The many rivers which make up the current system were impassable, and of little use for energy production or much of anything else.

The private power companies were entirely uninterested in developing more production capacity; they had all they needed to serve a handful of wealthy enclaves, and it was too expensive to run all those wires to the poorer population, so they didn't. Along came the TVA, along with government mandated rural electrification programs, and within a few years everyone had access to the miracle of electricity. That created a virtuous cycle with millions, instead of thousands, of people shopping for refrigerators and washing machines and lightbulbs and all the other gizmos we now take so for granted.

I know, I know, private enterprise would have done it "eventually", I am told. Edison invented the lightbulb in 1880. The TVA came about in the 1930's. How long should we have waited, particularly since the private companies went about ruthlessly enforcing their nascent monopolies by cream-skimming and holding the best customers away from anyone else who tried to compete?

No, this is just another ill informed rant by someone who takes it as faith that everything government does is wrong, and that the market always gets it right. Baloney.

Spending money at Mac Donald's circulates the money back into the economy faster than paying Lockheed to pay Raytheon to pay a university to do research on a fuel valve for the space shuttle.

See what I mean? The money at McDonald's pays the wages of burger flippers and farmers who produce the meat and the cows. The money spent by Loockheed pays the salary of researchers and fabricating plants which produce the test equipment for the fuel valve. How is that any different?

Well, for one thing, McDonald's R&D is a pittance, and the long term benefits are that we might get a veggie wrap someday instead of a Big Mac on the menu. The Lockheed money encourages engineering advancements which may show up in artificial heart valves, medicines grown in zero-gravity, smaller and smaller electronics, satellite deployment for new technologies such as GPS, and lots of other things. You might want to think of it as the Erie Canal of space, a piece of infrastructure which geometrically expands the possibility of humankind in the fields of medicine, communications, media, electronics, engineering, and so much more.

And McDonald's you might want to think of as "getting tastier french fries."

Many billions of dollars have already been given to the banks and they disappeared into a black hole.

Well, what didn't happen is that the worldwide financial system didn't collapse, which some people might consider a pretty good thing. It has in Iceland, it's about to in Ireland, there's a reasonable prospect of it happening in parts of Europe, and if we listen to people who say "Oh, let it all fall down" we shall be looking at the prospect of rebuilding the World Trade Center after it has already fallen to the ground, rather than being able to extinguish the flames expeditiously and rebuild the structure while it is still standing.

Why should new dollars have a different fate?

Maybe they won't. Then again, since you seem inclined to hold the gun to the economy's head and pull the trigger, maybe they will. It's like russian roulette. You keep doing nothing long enough and it all comes tumbling down. How quickly we forget the Down-500 point days last fall when Congress was following your advice, when Lehman failed, when government did nothing.

It appears that some people refuse to learn, they are so encumbered by naive political theory that they are incapable of looking around and seeing what's actually happening in the world.

Spending money at Mac Donald's circulates the money back into the economy faster than paying Lockheed to pay Raytheon to pay a university to do research on a fuel valve for the space shuttle.

See what I mean? The money at McDonald's pays the wages of burger flippers and farmers who produce the meat and the cows. The money spent by Loockheed pays the salary of researchers and fabricating plants which produce the test equipment for the fuel valve. How is that any different?

Well, for one thing, McDonald's R&D is a pittance, and the long term benefits are that we might get a veggie wrap someday instead of a Big Mac on the menu. The Lockheed money encourages engineering advancements which may show up in artificial heart valves, medicines grown in zero-gravity, smaller and smaller electronics, satellite deployment for new technologies such as GPS, and lots of other things. You might want to think of it as the Erie Canal of space, a piece of infrastructure which geometrically expands the possibility of humankind in the fields of medicine, communications, media, electronics, engineering, and so much more.

Then when the new Lockheed and Raytheon employees go eat lunch at McDonalds what happens? They get heart disease. See how the government screws things up.

It appears that some people refuse to learn, they are so encumbered by naive political theory that they are incapable of looking around and seeing what's actually happening in the world.

Goofyhoofy

I agree with you that there are some people like that. I also agree that you can find good things done by governments, even the worst ones. I rather liked Sputnik launched by the Kremlin. It shocked America out of complacency and into action.

The Panama Canal is an interesting case. A private company would not have had the clout to separate Panama from Colombia. That need a country with a big stick.

President Roosevelt

The popular acclaim that carried Teddy Roosevelt to the governorship of New York didn't stop there. In 1900, Republicans nominated Teddy as President McKinley's running mate. McKinley won a second term, and Teddy was sworn in as vice-president. Six months later, an assassin's bullet killed McKinley. At age 42, Theodore Roosevelt became the nation's youngest president.

Roosevelt assumed the office with the same vigor with which he charged up Kettle Hill. A long believer in Captain Mahan's theory of sea power, Roosevelt began to revitalize the navy. Now that America's empire stretched from the Caribbean across the Pacific, the old idea of a canal between the two oceans took on new urgency. Mahan had predicted that "the canal will become a strategic center of the most vital importance," and Teddy agreed.

You can look at it piecemeal, this canal, that dam, or you can look at it holistically. Lenin, Trotsky, Stalin, Marx were all for big government and look at the results. A failed state. Mao's report card is as bad or worse. Look at the huge failure of Cuba.

Let's not go to extremes. Lets just take a democratic but "directed" country like France. Would you say that France is ahead of the USA? Or compare a country against itself. Was a Labour UK better of than a Thatcher UK?

As I said in a different post, governments have to do what private enterprise is not able to do but that should be the limit of their intervention in the economy. So yes, if private enterprise cannot build Hover Dam then the government should do it. In Venezuela a private company made the Orinoco river navigable for ships up to a draft of 45 feet but then, US Steel has an incentive to do so to export our ore by ship from closer to the iron ore mines. They signed a 50 year contract with the government to recover the cost at 2% a year over that period of time. Under the right economic conditions a private company could have built the Panama Canal as well but the conditions were not there. That canal was more of an imperialist play than an economic play.

I think I summed it up quite well when I said that "Demand creates queues. Supply gets rid of them." This is my version of Say's Law which says that supply creates its own demand.I think this used to be the case, but no longer is. Most companies carry excess production capacity in case demand grows beyond expectations. In addition, there is inventory throughout the supply chain. The queue is on the supply side, not the demand side. How much of what you consume do you wait for, versus buying off the shelf? Even large ticket items these days (cars and houses) are readily available without waiting in a queue.

I believe in lesser developed economies what you say may be true...--Alan

I believe in lesser developed economies what you say may be true...--Alan

Of course I'm talking about an idealized situation, not a production setup in the real world. Depending on your distribution chain you have more or less inventory on hand to which you refer as supply side queue. Dell had practically zero before it stared selling in stores.

But, go to any bank in the USA or to any department store and have a look at the tellers or the checkout counters. The queue, if there is one, is always on the demand side. :)

The only way to reduce the queues is to add tellers or checkout counters or have them work faster which is the same thing, more supply.

But, go to any bank in the USA or to any department store and have a look at the tellers or the checkout counters. The queue, if there is one, is always on the demand side. :)Not true. When people are most likely to use the service, there is certainly a demand side queue... but that is more a characteristic of the service rather than the "quantity" of the service. The queue is created by demand bunching up relative to supply... lunch hour, before and after work, etc... the rest of the day there is more supply than demand... and if that is not true the company will certainly hire more service personel. IF there is more demand than is serviced by existing personel, then the business is poorly managed and will likely die. Many businesses are reducing queue times by cross training so additional staff can be brought in at critical times. Most banks and grocery stores have more capital (cash registers) than they are usually using, so it is not really a matter of capital, but staff optimization.

All of the people that want to do business with the bank or store will get service. The only question is how quickly that service will be rendered, which is a product characteristic rather than a product quantity.

Perhaps the smiley meant you understand this, in which case please ignore.--Alan

I see that I'm not being very clear so let me use a more dramatic example, the famine in Darfur. No matter how hungry those people are, no matter how much they demand food, they will starve if they depend on local production which is non-existent. Demand in Darfur does not lead to supply.

Banks also present a good example. If there is a bank run, the first people get their money and the last don't, no matter how loudly they demand their money. There simply is no more money. Same when too many people want to see a move the same night, when the seating is sold out, no matter how much demand there is for more seats, there are no more.

I see that I'm not being very clear so let me use a more dramatic example, the famine in Darfur. No matter how hungry those people are, no matter how much they demand food, they will starve if they depend on local production which is non-existent. Demand in Darfur does not lead to supply.Yes, as I mentioned earlier in less developed economies than ours "traditional" supply side economics more often applies. I suspect this is because in such economies inventory is near zero. I would not want to exclusively attribute economic growth or decline to either supply side or demand side. However, your original contention that increasing demand will increase queue is not true for much of our economy. Most businesses carry several months of inventory, and can react to demand spikes fairly efficiently. Our capital utilization is no where near 100%, and labor utilization is certainly very low right now.

Banks also present a good example. If there is a bank run, the first people get their money and the last don't, no matter how loudly they demand their money.Thanks to FDIC everybody gets there money. It has been a long time in the US economy since this has happened.

Same when too many people want to see a move the same night, when the seating is sold out, no matter how much demand there is for more seats, there are no more.True, but a VERY rare case. Local theaters have actually switched to showing popular movies on all screens... they can do this now since the movies are digital rather than on a physical medium.

I think your examples demonstrate how rare it is that things are limited by supply. It is much more common in OUR economy that GDP is limited by demand, not supply.

The Panama Canal cost the United States around $375,000,000, including the $10,000,000 paid to Panama and the $40,000,000 paid to the French company that previously owned the site. It was the single most expensive construction project in United States history to that time; remarkably, however, it was actually some $23,000,000 below the 1907 estimate, in spite of landslides and a design change to a wider canal.

I think your examples demonstrate how rare it is that things are limited by supply. It is much more common in OUR economy that GDP is limited by demand, not supply.

--Alan

I'm afraid we are talking past each other. I'm trying to illustrate a general concept of economics and you are using specific examples of the American economy saying that "our economy is different." The Japanese said the same thing during their golden years only to come crashing down because economics laws are the same the world over. How a particular economy works out is clearly influenced by the affluence and other factors of the country in question but the underlying economic laws are the same everywhere. I don't see how it could be otherwise.

I'm trying to illustrate a general concept of economics and you are using specific examples ...It wasn't me that brought up banks or movie queues...I have continued to point out that both capital and labor utilization are low. We have more supply right now than demand. IF the invisible hand was doing it's job and bringing supply and demand into balance, then what you are saying would be true; that adding additional demand would be inflationary or add "demand queue". However, our current production capacity exceeds demand so this won't happen.

There was an earlier thread (not sure which board) discussing the problems with Capitalism. I think most of the answers missed the point. The problem with capitalism is that it oscillates, and sometimes radically, and often with time constants on the order of years. The law you are trying to apply serves if the system is in a relatively stable state, but it is not right now.--Alan